Editorial: Oil mess

No clarity anymore on what is market-pricing

Some months ago, while most would have preferred a diesel-type regular hike in LPG prices, the government came out with a workable solution on petroleum pricing. Petrol was already decontrolled and, with diesel prices now above the market rate—between January 2013 and October 2014, retail prices were raised by R0.50 at discrete intervals of a month—they too were decontrolled. LPG prices were not to be raised each month, but a cap on the per cylinder subsidy is being proposed. This means that, were global LPG prices to rise after a point, so would the consumer price. No one expected the kind of collapse there has been in global crude/product prices—crude prices fell 31% over the past three months—but the subsidy was to be reviewed in March. Which meant that the subsidy cap could be revised downwards if need be. And, in any case, since direct benefit transfers were being tested and were scheduled to be rolled out nationally, this would save another R10,000 crore or so as there are roughly 2 crore fake customers estimated to be around even today.

The dip in tax collections, and the two-stage increase in excise duties on diesel and petrol, however, has made a mockery of the petroleum reforms. Given the government earned just R30,222 crore in Q1 from petroleum levies versus R1,52,900 crore in FY14, the hikes are more than justified as recoveries in subsequent quarters are going to be lower. But both hikes, customers have been told, are to be borne by the oil PSUs—quite the opposite of the reforms which mandated their passing on all benefits/costs to the consumer. On the face of things, there is still scope for this. So, if petrol prices fall globally and a R3 per litre cut is required, the oil PSU will not cut rates by R3, but will deduct the impact of the excise duty hike. The problem with this argument, however, is that it presumes oil prices are going to continue to fall. What happens if they rise? Indeed, had the oil PSUs known that the petrol duties would be hiked by R2.25 per litre—R1 on diesel—they would have tempered the last price cut just three days ago. Whether this is due to the lack of coordination between the ministries is not clear. What is, though, is that it was this kind of interference that resulted in the last price deregulation—during the last NDA regime and the UPA’s initial years—falling flat on its face.